The more, the cheaper

It’s great to hear the chairman of Alderon Resources, Mark Morabito, say that Muskrat Falls power is crucial to the future expansion of the Labrador iron ore industry. Because somewhere in that statement lies the seeds for a much better economic argument for the project moving ahead.

That may sound strange coming from someone who has had questions about the project’s economics for months now, but it shouldn’t. Here’s why.

More electrical customers mean spreading the costs of a major project over more users, and in the process, lowering the cost to power users on the island.

But there’s a big “if” in that equation.

Because right now, it’s just talk, and what companies like Alderon have to do is to actually put their money where their mouths are.

It sounds a lot like they’re just talking out of both sides of their mouths.

Big companies are fond of pointing out that they are going to be big players in the province’s economic future — yet, at the same time, while they are often big electrical customers, there’s no evidence they plan to pay their own freight.

Industries regularly argue that they should get discounted power, because they use so much and because their operations benefit the economy. In fact, right now, industrial users pay a special rate for power on the island that can see them paying less than the cost of producing power, meaning Nanny running her dryer in Pouch Cove can end up subsidizing oil refineries, nickel smelters and their international owners.

It’s a tidy argument, but one that could equally be made by any taxpaying citizen of the province: just as a mining company contributes to provincial coffers, so does anyone who pays taxes. So why should one citizen get cut-rate power, and another, not?

You might be able to make that argument if the Labrador mining companies that wanted power were firms that could locate anywhere in the country, and needed to be attracted, lured here, by competitive power rates.

Jerome Kennedy has suggested that is exactly the case with potential miners, saying in the House of Assembly on May 30: “These new developments will require an adequate supply of electrical power at competitive rates to proceed.”

On May 31, he said, “We do not have the industrial rates developed at this point, Mr. Speaker, but we know that as a province we have to be competitive with Quebec and Manitoba who produce the lowest rates in the country.”

He’s also said that mining companies were unwilling to pay for Muskrat Falls.

It’s not clear whether he means that the companies are unwilling to pay for the project’s costs on their own, or whether they are unwilling to pay for power at the price it would take to pay their fair share of the project’s costs.

But there’s a fundamental difference with the iron ore miners: they can’t move their ore deposits to another town or another province. So the only purpose for “competitive” power rates is to either make the mining fiscally possible, or else to fill the pockets of shareholders.

There’s nothing wrong with filling the shareholders’ pockets — at least, not as long as we’re not emptying the pockets of other power users in the province to provide the gravy.

And if we are asked to ante up the gravy?

In the words of Danny Williams (remember that guy?), just leave it in the ground. As he said about delaying the Hebron project until a deal was struck to benefit the province, “I’m prepared to stand my ground and take the consequences. If that means leaving a project … and not getting the benefit of the royalties until some time down the road, then this government is prepared to wait."

There’s even a suggestion that, horror of horrors, the mining companies might buy cheaper power from Quebec, so we should build Muskrat Falls to cut that off at the pass. Strangely, Mr. Williams, now on Alderon’s board of directors, is one of the people who is concerned about that.

Talk about cutting off your nose to spite your face: the mining companies are talking about the huge fiscal benefit this province would get from their operations.

Why would we want to cut into those benefits from our resources simply to spite a neighbouring province that, even if Muskrat Falls is built, can supply power more cheaply than we can as a result of the last horrendous mistake we made in hydroelectricity?

If Muskrat Falls is built (to follow the apparent logic), we would have to supply them power for less than Hydro-Québec would charge.

And that truly is a mug’s game, a kind of economic take-my-ball-and-go-home that makes “no more giveaways” the most empty of possible promises.

“We’ll sell you power at less than Quebec will sell it to you, just so Quebec can’t sell it” — that’s ludicrous, especially if the cost of producing the power is more than the price it’s being sold at.

More than anything else, it sounds like the mining firms want two prospective sources of power, all the better to play one off the other to get the lowest rates possible.

Here’s an option: Nalcor wants its subsidiary, Newfoundland Hydro, to sign a take-or-pay contract that would see ordinary ratepayers — you and me — pay for Muskrat Falls power at a set rate, even if we don’t use the power. We don’t need the power yet, but Nalcor thinks we’ll need it later. And you can’t finance the construction of a dam on forecasts: you need contracts, like the take-and-pay contract with Hydro, to raise the necessary funds.

If the Alderons of the world are so keen on their need for Muskrat Falls, ask them to sign a take-or-pay contract for their block of Muskrat Falls power under the same terms as all the little people are supposed to accept, or at the very least at a price equivalent to the full cost of production of the power they intend to use. (Because, after all, Alderon wouldn’t agree to sell iron ore for less than it cost to produce.)

Spreading the risk to companies that clearly intend to benefit from exploiting our resources could go a long way towards lowering the cost that everyone else has to offer up.

And it could do nothing but make Muskrat Falls more attractive — and its power costs far closer to a reasonable price for all users.

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Winston Adams

June 11, 2012 - 12:47

John Smith: 1. you go on and on without addressing the point made in the editorial- that we should not sell power to the mining companies in Labrador for less than cost. What's your opiniion on that?
2. You say we need more power for electric heating here on the island, that we have to meet that demand somehow, and that there has not been one better argument to meet our future energy needs. We are presently wasting about 600 Mw due to old technology used for heating our homes and for hot water. That's a lot of juice. We can reduce our waste using modern heating systems to solve our current problems, including Holyrood polution, and at much cheaper cost. For the long term? define that. I would think it would make Muskrat unnecessary for a decade or more. So there is no rush , no need at present for that finacially unsound project, not for our island needs. I've asked you to comment on this before , but you are silent. See my presentation on the PUB website. I assume it is not too technical for you. If so , perhaps I can simplify it some more.

Wake up John Smith and smell what you are shovelling. The Muskrat idea does not bear a single speck of economic sense. The NL taxpayer cannot afford to take on such a huge risk only to subsidize energy rates for the folks on the mainland. We have been doing OK with the oil revenues although the looming predictions of $70 oil could put a damper on that. Let's not voluntarily give back all the gains from the oil back to the mainland. We have given enough through the fishery and continue to give back on the upper chuchill until 2041.

Please Use logic John Smith before you make statements on something which nobody has complete knowledge of what to do.

June 11, 2012 - 11:01

John Smith, the problem is NOBODY knows where the World Economy is heading or will be situated in 2017. The World Economy is very FRAGILE and nobody can predict at this very moment what is going to happen. By the time the history on the current Economic Woes are clued up, everything might have to be set back to ONE, that includes the costs of Energy. Why don't we wait and see what is coming down the chute on the grotesque and gargantuan debt held by the European Union Countries and the United States. The Greece Election coming on June 17 is supposed to determine whether or not the Euro and European Union will be disbanded. We, the ordinary folk, have no clue on how our Canadian Government and Banks are intertwined in the Global Economy. This is a very frightening World we are living in, and why make it more frightening for Newfoundlanders and Labradorians, who have suffered long enough by been shafted ever since they inhabited this hauntingly beautiful place, which was well endowed by Nature with the best Natural Resource cache in the whole World, yet we never derived any benefit from it because the Politicians, we elected saw to it that other places in Canada, the World and themselves became the sole beneficiaries of those coveted natural resources.

Everyone should remember that the problem is that we will need more power here on this island by 2017, and we will be in real trouble by 2020. That is a fact. So, when the people at Nalcor were tasked with looking at ways to provide this power, a dam at Muskrat made the most sense. Only a fool would think that spending a billion dollars refurbishing a 50 year old plant in Holyrood, spending up to 200 million a year on oil for it, and daming the last two small rivers on the island would make any sense. We would have spent almost half the cost of muskrat, and we will be back at square one in ten or fifteen years. If you look long term it makes so much sense to build muskrat. We will have all the power we will need here on the island, we will be able to sell the excess with total recall rights, as we will sell it on the spot market on a daily basis, we will be paying ourselves, for our own project, not the sheiks in Saudi Arabia for dirty oil, we will have a connection to the mainland, we will stop polluting the atmosphere, we will stop the ever raising of our rates.Remember 2008? The mines in Labrador were closing up and laying off with the downturn in the economy...two years later they were hiring and expanding...such are the vagueries of industry, and industrial demand. If you go to the PUB site and look at #103 of the Nalcor exhibits you will see that residential demand has grown every year for the past ten years...we have to meet that demand somehow.All along Nalcor and the government have said this development is for our own supply of energy here in the province...that has not changed. The other thing to remember is that these mines are not all going to come online at the same time, it will be over ten or fifteen years, as mills are built etc. The other problem is getting the power from HQ to the mines, that as well will cost someone a lot of money. While industrial demand, be it the Vale plant in long Hr. or the two GBSs proposed for Bull arm, or the ferries proposed for Marystown, or the four new 12 story buildings now being built in St. John's will all require more power, the bottom line is that we will need more power...and Muskrat makes the most sense for creating that power. There has not been one argument against the project that provides a better long term answer to our future energy needs...not one.

You do or not do something based upon whether it is "fair" or not but whether it is wise. "Fair" is subjective, vague and emotional. There may be plenty or reasons not to do something but appeals to the heart strings for the benefit of the little people are poor reasons. Get out the sharp pencil and let those who understand facts and figures decide. Just as an aside, I have been involved in many projects and business ventures and from my experience it is rare when economic viability created by consumer based demand carries a large project for a long time. Larger commercial interests usually supply the juice for economic success.

The horror is that Hydro Quebec would sell the cheap power from the upper churchill to the mining companies in lab west and the cost of upper churchill power to Hydro Quebec is going down to 1.5 cents per kwh in 2016. No one is going to be able to compete with that.

Its actually going down to .0020 cents per kwh fro its current .0024545 cents per kwh.

Winston Adams, I Agree with you this Crony Capitalism in the most corrupt state.

June 09, 2012 - 13:26

Winston Adams your statements that "Muskrat for mines makes more sense, but only on the principle of no giveaway. If they get cheaper power from Quebec, so be it. Don't sell power for less than cost. That would be stupid,and shameful: the poor paying for the rich mine shareholders to get richer. Capitalism at it's worst. This is not so much businessmen being smart, as being corrupt, with lots of help from their political friends. I doubt our people will stand for it". Well stated Winston Adams!!!!!!!! If this contract is a "sheep in wolves clothing" as we all suspect, it has to be overturned and Premier Dunderdale should make sure it is done immediately.

It seems the truth is slowly emerging, the power of Muskrat Falls is wanted by mining companies more than needed for the island load growth. Which is the reverse of what we were initially told. And what better for the mining company share holders than have the all of us subsidize them for power less than cost. We are told that our bankruptcy as a country in the 1930's was primarily caused by debt incurred for the Nfld railway that never did show a profit. But the promises were that if would help develop the economy, mining projects etc. Some things don't change. But perhaps we are not as gullible as a century ago. The polls suggest that more and more realize that Muskrat smells. Russell is right. Muskrat for mines makes more sense, but only on the principle of no giveaway. If they get cheaper power from Quebec, so be it. Don't sell power for less than cost. That would be stupid,and shameful: the poor paying for the rich mine shareholders to get richer. Capitalism at it's worst. This is not so much businessmen being smart, as being corrupt, with lots of help from their political friends. I doubt our people will stand for it.

Good article Russell, but you are missing a key point or two. Firstly, there is only so much power to be produced by Muskrat Falls, so what we really need to know is: How many MWs of power do these nine or so mining developments need? If that answer is say 100 MW each, which would not be abnormal, that means all the power of Muskrat Falls will be used in Labrador on mining developments and associated infrastructure. Given that to be true, the second big problem is price. Quebec currently sells power at a more expensive rate to large users like mines than Newfoundland does. We sell it for around 4 cents a kwh for large users. That means we are making electricity at a cost of anywhere from 15 cents/kwh to 40 cents/kwh, and selling it at the most for 4 cents. A massive loss that will have to be covered by huge rate increases and likely direct subsidies from the provincial coffers. Iron mines have a business life cycle from 8 years to 20 or so. Is that the price we want to pay for the very few?

Brad cabana, crawl backino the hole you came from, nobody is interested in whart you think in Newfoundland!

Cyril Rogers

June 09, 2012 - 09:23

Lost in this sudden play to developing these iron ore mines in Labrador is the initial heady rush we all got when the former Premier made his grand announcement to bulid Muskrat Falls. I was initially onside, given the numerous obstacles posed by running power through Quebec, but quickly came to the realization that this was not a panacea to redress the wrongs of the Upper Churchill deal. The more I learned, the more rotten this deal became. Only recently have these mines emerged as a potentially strong consumer of the power from this project, but as Mr. Wangersky points out, producing power from Muskrat will ALWAYS be much more expensive than from other sources, including Quebec. Therefore, any rationale for building MF must include the realization that it is, and always will be, some of the most expensive power on the planet. For what? The big lie is that it was supposed to replace Holyrood but now, it seems, we are going to supply the new mines in Labrador, at a highly subsidized rate. Here's the thing about that: we, through a set power deal involving NL Hydro, must purchase a set amount of power annually, in order to make it the economics of MF look even halfway feasible. In reality, we do not, and may never, need that particular source of power, so all we are doing is subsidizing, at great cost, the development of private mines. We will pay, through higher, much higher, power bills, to subsidize the shareholders of these mines, including the former Premier. Is that a coincidence? Meanwhile, the big bad wolf in Quebec, has oodles of excess power that they are selling for a fraction of the cost of power that MF would produce. Their energy glut will continue for decades, with the advent of shale gas, and these proposed projects can continue to purchase cheap power from Hydro Quebec for the life of those mines. It is a terrible deal for us and, given the intransigence of the PC government, one has to wonder who the real beneficiaries will be. I can guarantee this much: it will NOT be ordinary consumers.

Mr. Wangersky you have written a great article with great advice. As you said Mr. Wangersky if the Alderons of the world are so keen on their need for Muskrat Falls, ask them to sign a take-or-pay contract for their block of Muskrat Falls power under the same terms as all the little people are supposed to accept, or at the very least at a price equivalent to the full cost of production of the power they intend to use. (Because, after all, Alderon wouldn’t agree to sell iron ore for less than it cost to produce.)